Stickin' It to The Man

If you could fall behind on your mortgage knowing that you will not lose your home, will not need to move out, and that the loan will be favorably restructured (at a much lower monthly payment) once you're 90 days delinquent, would you do it? That is exactly what many underwater Fannie and Freddie customers could do under a re-structuring plan that will halt all foreclosure and eviction proceedings between Nov. 26 2008 and Jan. 9, 2009. Most will not qualify, but for those who do it will be a once in a lifetime opportunity to have their cake and eat it too.

There are a few catches. For one thing, your loan has to be owned or guaranteed by Fannie Mae or Freddie Mac, and it has to be worth at least 90% of your home's present value. Additionally, your current mortgage payment must be at least 38% of your income. Your credit will take a hit, but a FICO spokesman said that "one isolated delinquency will do less damage to your score than it has in the past," and that "if it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, that's what I would do."

This is priceless. It's also somewhat disturbing, but I'm getting used to that.

Economist Peter Schiff notes that the scheme rewards more than just default; it rewards seemingly crazy behavior like quitting one's job. Many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

This is a once-in-a-lifetime opportunity. People are going to feel like complete morons if they don't participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford.
--Peter Schiff, President, Euro Pacific Capital

Technically, Schiff is correct, and it's not a crime to default on your mortgage. If you can reduce your principal amount by hundreds of thousands of dollars just by quitting your job for a few months, that's a deal that might actually make sense for some people depending on their situation. It's a pretty perverse incentive for the government to pony-up, but that's the hand that millions of Americans are now being dealt.

The irony here is delicious. Banks are perfectly happy playing around with the fine print of credit-card agreements to better screw their customers. That said, it stands to reason that these same customers would start optimizing their own situation with respect to the banks.